No local shake-out at Fonterra after all

Company News

by Glenn Dyer

The world’s biggest dairy company, New Zealand’s Fonterra (ASX:FSF), will keep its Australian operations, deciding not to sell after having them on the market for the best part of a year.

Despite some tyre kickers, Fonterra seems to have concluded that its Australian businesses are too valuable and too closely linked to its core operations in New Zealand.

Justifying keeping the Australian operations, Fonterra CEO Miles Hurrell said the Australian consumer brands will be important in the company’s strategy of moving higher up the value chain.

Fonterra Australia includes consumer brands such as Western Star butter, Perfect Italiano and Mainland cheese. It also operates the Bega cheese brand under a long-standing licence arrangement even though Bega Cheese is a dairy rival.

Analysts said the decision to keep the Australian business will reduce the $NZ1 billion in capital slated to be returned to Fonterra shareholders and owners.

Fonterra is still looking to sell its operations in Chile, which were marketed at the same time as those in Australia.

NZ analysts explained that Fonterra’s Chilean assets – dairy brand Soprole and its milk supplier Prolesur – do not require any New Zealand-sourced milk or expertise, while its Australian business used both Australian and New Zealand milk.

“Australia plays an important role in our consumer strategy with a number of common and complementary brands and products and as a destination for our New Zealand milk solids,” Hurrell said on Thursday. “The business is going well, and it will play a key role in helping us get to our 2030 strategic targets.”

The sale of the Australian and Chilean assets were a big part of the company’s strategy update published last year which looked to 2030 and which promised a capital return of $1 billion, much of which was to come from the asset sales.

Fonterra has also retreated from China where it racked up big losses.

The retention decision for Australia came as Fonterra revealed its 2021-22 annual results.

Fonterra’s profit slid 3% to $NZ583 million in the year to the end of July. That included an $NZ80 million hit to its Sri Lankan business following economic disruption in that country.

With interim earnings down 7%, the smaller annual fall indicates a better second half performance.

Revenue rose 11% to $NZ23.4 billion, but sales volumes fell due to short-term shifts in demand and ongoing shipping and supply disruptions. Operating expenses rose 7% to $2.4 billion, reflecting inflationary pressures and supply costs.

Fonterra will pay a final dividend of 15 NZ c a share, taking the annual dividend to 20 NZc, unchanged from the previous year.

The co-operative confirmed its final farmgate milk price for the 2021-22 season was a record $NZ9.30 per kilogram of milk solids, injecting $NZ13.7b into the NZ economy. That was significantly ahead of $NZ7.54 per kgMS the previous season.

For the coming season, the co-operative has forecast a milk price of $NZ8.50 to $NZ10 per kgMS, suggesting a payment of a near record $NZ9.25 per kgMS to dairy farmers.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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